What’s Next for Brazil’s Integrity Index

Impact of the Petrobras Lava Jato Case

The 2008 financial collapse began in real estate loans but quickly spread throughout the US economy and the world. The aftereffects are still felt today in banking, with strict regulations and the increased roles of internal compliance departments. The way business is conducted in the real estate loan market has changed permanently, and governments and companies want to prevent another collapse.

A similar shift is occurring now in Brazil.

“Operation Car Wash”

The ongoing Petrobras scandal appears to be the highest-profile example of political corruption in Brazil. Operation Car Wash (Lava Jato), as it is known, implicates Petrobras, a state-owned oil and gas company, in a fraud and corruption scandal that includes allegations of receiving improper payments, willfully overpaying for services, and distributing contracts to private firms in exchange for “commissions.” These kickbacks would be distributed to political parties, individual politicians, and certain Petrobras employees.

This case began in 2008 as an investigation into money laundering at Posto da Torre, a Brasilia gas station (hence the term Lava Jato, which means “car wash”), and moved up the chain all the way to Petrobras, multiple high-ranking executives, and government officials. Several important figures have been arrested and/or imprisoned. Former President Dilma Rousseff was impeached and removed from office in August 2016, just after the Rio Olympics, under a cloud of allegations from her time as chair of the board of Petrobras from 2003 to 2010. Her predecessor, former President Luiz Inácio Lula da Silva, is facing charges of corruption and money laundering.

To say Operation Car Wash has been disruptive to Brazilian politics would be an understatement. But such political corruption is not isolated to just Petrobras; it is widespread in all levels of politics. The practice of “overbilling” is common for politicians and civil servants in charge of contracting and buying for public institutions.

It is also not a recent phenomenon. The Petrobras case is “business as usual” in Brazil, as well as in other emerging economies such as Mexico and South Africa.

Nevertheless, bribery is not a simple white collar crime with no real victims. Just as the victims of the 2008 collapse were homeowners mired in debt, the victims of bribery are the disenfranchised and powerless. Estimates show more than 2 percent of global GDP is wasted annually due to corruption, with over $1.5 trillion alone wasted in bribes.[1] This money could otherwise go toward building infrastructure, caring for the poor, building or improving schools, and other initiatives that could shape a better future. National protests in 2015 and 2016 that flooded the streets of Brazil highlight the frustration of the people.

Brazil Clean Company Act

In 2014, Brazil enacted the Clean Company Act to counter widespread corruption in private and public sectors. Under this law, companies can now be held responsible for corrupt practices of employees and liable without finding fault. Companies can no longer make the excuse that a “few bad actors” were solely responsible for corrupt acts. Executives can now be held responsible for decisions being made on behalf of the company.

Under this legal framework, many executives of private companies have been given jail sentences for their companies’ involvement in bribery and corruption schemes. The consequences of getting caught are no longer just a monetary fine; they could also mean jail time, and not just for Brazilians. Similar to the US Foreign Corrupt Practices Act (FCPA) and United Kingdom Bribery Act (UKBA), the Brazil Clean Company Act allows for extraterritorial reach, meaning any company doing business in Brazil can be punished.

What’s Next for Brazil

Any company currently doing business or looking to do business in Brazil needs to assess its practices and work on achieving compliance with local (and international) laws. The US FCPA and UKBA apply and, combined with the Clean Company Act, create some of the strictest rules and regulations in the anti-corruption legal framework.

As a result, companies need to put in the time, money, and effort to ensure compliance. It may seem too early to spend the time and resources when the final results of the Clean Company Act are not yet clear, but consider the case of Siemens AG. When facing allegations of corruption, this global company had two options available:

Fight the allegations, assert attorney-client privilege, and drag all parties through a longer legal process; or

Come clean, waive attorney-client privilege, and work with regulators to find solutions.

Embroiled in a legal battle, Siemens AG made the difficult choice of taking the second option, which turned the company into a model of honor, integrity, and best practices. It even adopted the slogan “Only clean business is Siemens business.” The penalties and legal costs, while already steep, could have been much worse if Siemens had chosen the first option.

Now the stakes are even higher. Siemens mostly faced heavy financial penalties. Executives in another company in the same situation today in Brazil could face jail time.

If an internal investigation finds that your company has violated the Clean Company Act or other similar laws in Brazil, the best probable course of action is:

Under the advice of investigative experts, gather as many facts as you can

If able and within a reasonable time, lay out potential solutions to these violations

Consider self-reporting to regulators, under the advice of counsel

You won’t be able to avoid punishment, but coming clean goes a long way with the regulators and will help you reestablish your credibility. Approaching regulators with potential solutions ready signifies that you are proactive in taking responsibility, while also putting you in a better position to start the recovery process.

Nobody wants to willingly subject themselves to the social stigma of being a corrupt company, but it is better than getting caught.

If American firms think the new administration will relax regulations, consider recent remarks by Attorney General Jeff Sessions: “This Department of Justice will continue to investigate and prosecute corporate fraud and misconduct; bribery; public corruption; organized crime; trade-secret theft; money laundering; securities fraud; government fraud; health care fraud; and Internet fraud, among others… We will continue to strongly enforce the FCPA and other anti-corruption laws. Companies should succeed because they provide superior products and services, not because they have paid off the right people.”

Furthermore, “The Department of Justice will continue to emphasize the importance of holding individuals accountable for corporate misconduct. It is not merely companies, but specific individuals, who break the law. We will work closely with our law enforcement partners, both here and abroad, to bring these persons to justice.”

These remarks were delivered at the Annual Ethics and Compliance Initiative Conference in Washington, DC.[2] The attorney general acknowledged how out of the ordinary it was for someone in his position to speak at the event, emphasizing the weight the Trump administration places on compliance and anti-corruption measures.

Business as Usual

Companies may look at the situation and decide to take their chances with the law. After all, “greasing the wheel” is how business has always been done. And if you don’t participate, you will lose out on money now, especially if another company continues doing business as usual.

However, just as the 2008 financial collapse changed the way banks must handle their loans for the future, the Clean Company Act will change the way companies do business in Brazil going forward. Things may not be so different in 2017, but the coming years will see major shifts in business practices.

The transition will be painful.

But ask the bank that did not get overly involved in REITs. It lost a lot of profit during peak years and watched as other banks raised their bottom lines, but also breathed a sigh of relief when the market collapsed. Those banks that benefitted during the bubble either went under or were holding massive amounts of bad debt that will be headaches for years. It’s simply not worth it.

Corruption cases are not isolated to just one set of prosecution. Look at the Halliburton case in Nigeria. As schemes unwind and details emerge over time, old sins can come back to haunt a company and result in even more penalties. There are only so many ways to cover bribes and corruption, and every method leaves a trail that can eventually be found. This is particularly true on a scheme involving accounting and books and records—there is only so much “bookkeeping” one can do before it all unravels.

“Business as usual” is not possible anymore. Just as after the financial collapse the banking industry shifted toward robust compliance departments and risk controls, companies around the world will start investing heavily in anti-corruption measures and controls. There will be less pressure to break the rules to stay competitive, especially when it seems like the other companies are doing the same, and more pressure to stay clean and avoid penalties. And if you are still doing “business as usual” years from now, then other companies (especially international conglomerates) will not be able to do business with you because of the risks you carry.

If you don’t become a “clean company” now, you may harm yourself down the line, not just in terms of prosecution from authorities, but also because other businesses will avoid you so that they don’t get in trouble.

And it’s not enough to just put a compliance department in place, says Wifredo Ferrer, leader of Holland & Knight's Global Compliance and Investigations team and former US Attorney for the Southern District of Florida. “One constant theme that I see in our cases is that simply creating a certified compliance program does not, on its own, avoid criminal liability. Rather, effective implementation of the compliance program is required.”

Brazil’s Economy Moving Forward

The Brazilian economy is the ninth largest in the world by nominal GDP, the largest of Latin America, and second only to the US in the Western Hemisphere. This is not a small country, nor is the real-world reach of the Petrobras Lava Jato case small.

Recently, the economy of Brazil has been dragging. The nation ended 2016 with national unemployment levels at 11 percent and youth unemployment even worse at 20 percent, while GDP shrank by 3.5 percent over the previous year.

How the Clean Company Act will affect Brazil’s economy is yet to be seen, but money that was improperly used will no longer be a drag on the rest of the economy. An estimated US $11.3 billion was moved in an “improper manner” in the Petrobras case alone. Bribery and overbilling are inefficient uses of capital.

Also, foreign investments into Brazil may become more favorable as compliance initiatives take hold. Corruption is a problem in emerging markets, as reflected in Moody’s downgrading of Brazil’s credit rating to junk levels in February 2016. Brazil needs to rebuild trust in its government and companies among its citizens before it can rebuild trust around the world. The Clean Company Act is a strong step forward in that direction, but it can only be effective if companies adhere to and cooperate with this new regulatory environment.

Wrap Up

Get advice. Get ahead. Get in compliance. Do the work now. Seek counsel. Seek advisors. Seek experts. Come clean if you need to. The business environment is changing—don’t get left behind.

Public sentiment is strongly in favor of clean companies. Social media makes public sentiment against corruption all the stronger because of the level of exposure these cases can have.

The environment going forward is clearly trending toward clean companies in compliance with regulations on a global level. Things will not be going backward toward less regulation.

If nothing else, begin a major effort to change the culture of the organization to ensure that all employees, at all levels, understand which types of cultural behavior will not be tolerated. For example, a formal mandatory training process should be implemented on appropriate ethical behavior and integrity.

Be a company that is ahead of the curve. Companies that go through the pain now will reap rewards in the future. The benefits outweigh the costs in the long run.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.